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Fund Flow Management Assignment Help

The word Funds means Working Capital & the word ‘Flow’ means Change. Hence Flow of Funds means a change in the working capital. There is always a specific level of funds as at the Balance Sheet Date. Throughout the year there are fund inflows and outflows. So fund experiences a continuous change throughout the year. At the end of the year i.e. at the next balance sheet date, the total funds stand at a different level. If we want to measure the difference between the funds at the two different balance sheet dates, we need to find the difference between the total fund inflows and total fund outflows. But it is important to take into consideration only those transactions which actually affect the flow of funds. The transactions which do not affect the funds will not be considered for Fund Flow Management.

Objectives of Fund Flow Management

A business prepares two statements at the end of the accounting year; i.e. Balance Sheet which shows the financial position of the business as at the Balance Sheet Date and Statement of Profit and Loss. These statements show the working capacity and efficiency of the business. But they do no show the movements of the funds within the business and their consequent effects on the business operations. But it is necessary for the business to know about the movement of the funds within the business. Because these help in determining if the business has sufficient funds to carry out the business. It might be possible that the business earns a sufficient profit over the period of time but fails to have sufficient liquid funds to pay out the obligations or dividend to the shareholders. It will force the business to rely on the credits from outside resources. Thus it is necessary for the business to have a reliable fund flow tracking so as to ensure that the business processes are performed effectively. The Fund Flow Management helps in ascertaining the following:

To identify the strengths and weaknesses of the Financial Structure of the business.

To check if the credit was taken or loan received is being used efficiently in the business.

To check whether the changes in the assets or other sources are valid and what are the reasons for such changes.

Limitations of Fund Flow Management:

Fund Flow Management does not keep a track of Cash Position in the Business. This is why businesses have to prepare an additional statement of Cash Flow Statement. This is a lengthy task for the business.

Fund Flow Management is just a supplement to the Financial Statements. It contains no new facts that can be used to arrive at a decision.

Fun Flow Management is based on the books of accounts. It just presents the already existing statements or records of books of accounts. It lacks the originality as no new fact is revealed that will help the management to take decision efficiently.

Fund Flow Management is based on the historical data. It gives no new information about the business which will help the management to take decisions or formulate strategies. Thus the businesses avoid making the Fund Flow Management reports.

Accounts to be made for Fund Flow Management:

Fund Flow Management requires detailed checking of the accounts of the business. Thus it should be made very carefully.

Following are the accounts used to make the Fund Flow Statement of the company:

1. Schedule of Changes in Working Capital: This statement is used to track the changes in the working capital of the company. It takes into consideration only the Current Assets and Current Liabilities of the company and checks the decrease or increase in their value over a period of time. The following rules are applied for preparing this statement:

2. Funds Flow Statement: The Fund Flow Statement is the tracker of funds in the organization. It keeps a track of how the business has been financed through the funds in the business and how those funds are being used between the opening and closing date of the Balance Sheet. It helps in tracking two major things: Sources of funds and Use of Funds. This statement is known by various titles such as Statement of Sources and Application of Funds, Statement of Resources Provided and Applied and where Got and Gone.

Sources of Funds: Following are the sources from where the funds are received:

Important Points to be taken care of while preparing Fund Flow Statements:

When both aspects of a transaction belong to a non- current category or are of current category or one is of Current Assets and other of current liabilities, then such transactions will not bring any change in the flow of funds.

When both the aspects of a transaction include one aspect of Non- Current Category and the other of Current Category, such a transaction will bring a change in the flow of funds.

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